Apple App Store – House of cards

The concession that brings down the house.

• Apple’s most recent changes to its App Store policy look like little more than an attempt to win favour with both the US Government which is considering antitrust action and the judge currently considering her verdict in the Apple vs Epic battle royale.
• Apple is hoping that this will put the debate to bed and allow things to carry on much as they were before, but I suspect that this is just the beginning of the end of the payment monopoly on iOS and Google Play.
• Apple’s most recent change will now allow developers of media apps that offer a content consumption service to place links in their apps to their websites for payment.
• Apple has also changed its rules such that developers are now able to communicate with users and advise them of cheaper payment mechanisms but critically there is no change to transactions that are carried out from within the app.
• None of this applies to games which are where most of the money in the app economy is generated and is where Epic is fighting Apple.
• Paying for a service using a credit card on a website on a mobile phone is a horrible experience and I suspect that Apple will do very little to make it any easier.
• However, with a difference in price of 30%, users have a strong incentive to endure the poor experience, especially in many cases as they will only have to do it once.
• I think that it is pretty clear that if there was no possibility of regulatory action or a verdict that the judge herself has said that neither party is going to like, then there would have been no change in policy.
• Hence, it is not difficult to conclude that Apple’s motivations are purely mercantile and that it has very little interest in improving options for developers where it has no incentive to do so.
• As this move is selective in terms of which developers it helps, I expect that regulators, adjudicators, and lawmakers will see this for what it is and disregard it when it comes to making their decisions.
• Hence, I think that the regulatory risk for Apple is unchanged and that Apple is going to have to make some concessions to Epic as a result of the case.
• The judge in this case has said that neither side is going to like the outcome which means that something is going to change as Apple was fighting for things to remain the way that they are today.
• Hence, the outcome is likely to be a net win for Epic (any change is an improvement) and maybe other developers. but it is also likely to fall far short of what they really want.
• However, I think that this is just the beginning and that the door is now open to competition for payment mechanisms on iOS and Google Play.
• The end result is that the 30% fee will probably be split into payment services and developer services as currently they are all rolled into one.
• This will allow full competition for payment as well preserving the ability of the platform providers to charge developers for the services that they consume.
• The app stores are therefore likely to take a hit to the fees that they charge developers but given how small these revenues are compared to the behemoths that are Apple and Google, it won’t move the financial needle even if the revenue share falls to 10% or less.
• Hence, I don’t see much impact on the share price of Apple or Google from this debacle.
• At 9.4x 2021 EV / revenue and 28.9x 2021 PER, Apple offers little value, a very poor dividend yield (0.6%) and I am happy to continue avoiding it.